Q2 2023 Kingsoft Cloud Holdings Ltd Earnings Call
Participants
Haijian He; CFO & Director; Kingsoft Cloud Holdings Limited
Nicole Shan; IR Officer; Kingsoft Cloud Holdings Limited
Tao Zou; Vice Chairman of the Board & Acting CEO; Kingsoft Cloud Holdings Limited
Allen Li; Research Analyst; JPMorgan Chase & Co, Research Division
Timothy Zhao; Research Analyst; Goldman Sachs Group, Inc., Research Division
Xiaodan Zhang; Analyst; China International Capital Corporation Limited, Research Division
Presentation
Operator
Good day, and thank you for standing by. Welcome to Kingsoft Cloud's Second Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nicole Shan, IR Manager. Please go ahead.
Nicole Shan
Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's second quarter earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com as well as on Global Newswire Services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou; and our CFO, Mr. Henry He. Mr. Zou will review our business strategy, operations and company highlights followed by Mr. He, who will discuss the financial and guidance. We will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretation. Our interpretation are for your convenience and reference purpose only. In case of any discrepancy, management's statement in our original language will prevail. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as mandated and as defining the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relates to [U.S.] that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Finally, please note that, unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and CEO, Mr. Zou.
Tao Zou
[Interpreted] Hello, everyone, and thank you all for joining Kingsoft Cloud's Second Quarter 2023 Earnings Call. During the quarter, we continued to uphold the principle of high-quality and sustainable development build success based on technology and innovation and forge our reputation throughout the entire business process with customer centricity. We have enhanced our operations management and proactively embrace the new AI era. This quarter, our profitability further improved. Total revenues reached RMB 1.84 billion. Adjusted gross margin increased steadily for the fourth consecutive quarter to a new record high of 11.3%. Adjusted gross profit reached RMB 207 million, more than 3x the amount for the same quarter last year. Normalized adjusted EBITDA margin was negative 3.3% in which represents a significant improvement of 5.3 percentage points from the same quarter last year and 2.6 percentage points from the previous quarter.
In terms of public cloud services, revenues were RMB 1.16 billion with a gross margin of 5.2%, significantly higher than and turning positive from the negative 2.4% gross margin in the same quarter last year. We continued to focus on 3 priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, customer mix and cost reduction. First of all, we continued to serve Xiaomi and Kingsoft ecosystem well. In particular, total revenues from Kingsoft Group increased by approximately 15% year-over-year. Second, we continued to optimize our customer mixed. The revenue share of our largest customer dropped further to around 16%, while signing up more than 20 new medium-sized customers. Meanwhile, we also resolutely withdrew from long-term loss-making projects and customers, achieving a more balanced and healthier revenue mix. Third, we have made cost reduction and efficiency improvement and ongoing initiatives. We established a dedicated cost optimization team to tackle redundancy including the cancellation, relocation, consolidation, reuse and disposal of such resources and assets yielding remarkable results.
Moving on to Enterprise Cloud Services. Total revenues were RMB 675 million, with a gross margin of 21.7%, a significant improvement from 15.3% in the same quarter last year. In public services phase, we opted to focus on core areas of public service cloud and state-owned assets cloud. executing a differentiated approach would not only build clouds for customers, but also develop an end-to-end cloud service model, covering cloud migration, cloud usage and cloud management. We have forged our core competitiveness of standardized, the public services cloud operation capabilities applicable to both public service cloud and state-owned assets cloud. For example, we have been the partner for the Beijing Public Service Cloud for 9 consecutive years, winning a strong reputation to deliver secure, reliable and easy-to-use systems and services. resulting in a virtuous cycle of increased cloud adoption by more than 50 public services departments. In digital health space, we have maintained a steady ensure approach. First, consolidating our strengths then expanding in scale. Our proven capabilities and leadership in super large ultra-complex landmark cloud projects have provided a solid foundation for further growth.
On one hand, we are horizontally replicating our original health care cloud model to more regions. Our model features an innovative architecture recognized by China's National Health Commission and Industry Associations. It has been promoted to more than a dozen provinces as an industry reference framework, allowing us the opportunity to engage more deeply in the construction of the national public health systems and medical digitalization platforms, producing remarkable economic and social benefits. For example, we completed the first phase of the Jiangsu medical image cloud project, integrating image data from over 1,300 hospitals across the province with estimated annual savings of RMB 2.4 billion from reduction of duplicated medical images. Building upon our successful experience of this landmark project, we have replicated our imaging cloud project in [Chongqing] province. Meanwhile, we are working on the plan for the second phase of Jiangsu Imaging Cloud project which, upon completion, is expected to connect all the public hospitals across the province to the cloud platform.
On the other hand, we're also vertically penetrating our business to a hospital level. We are partnering with a number of top-tier hospitals to facilitate cloud-based next-generation digital transformation. Our solution addresses a number of pain points, including high maintenance costs, server instability and low and slow response to user requests. For example, we helped Zhongnan Hospital of Wuhan University, a Grade A tertiary hospital, transformed its modular system with microservice architecture, developed an innovative data structure for [Dongxing] Hospital, creating a loosely coupled horizontally integrated architecture for its platforms and applications, enabling business process optimization and unified data management. In the financial services space, we completed and delivered a batch of big data projects for leading financial institutions as well as the second phase of China Construction Bank's cloud infrastructure development project. We're now in the process of deploying the third phase of this project. Turning to Camelot. During the quarter, Camelot achieved solid business performance, signing up 6 new customers while maintaining robust relationships with existing major clients. its profitability remains at a healthy and stable level.
In terms of product and technology, we uphold our principle of building success based on technology and innovation by delivering best-in-class customer experience across our core product offerings. In storage space, we launched a deep Ultracloud data archive product, particularly well suited for data management use cases, including medical imaging, financial documents and compliance and archives. In big data space, our big data product were recognized for its overall strength and ranked among the top 3 leading Chinese companies by IDC a premier international institution in its Data Lakehouse Platform technology assessment report 2023 in terms of its comprehensive capabilities such as data management, storage, development and security. In database space, we entered into strategic partnership with [EnCap,] leveraging our respective strengths to jointly provide a fully managed distributed cloud database services. In Enterprise Cloud space, we upgraded our Galaxy Stack management system, a unified platform facing operation and maintenance personnel and the cloud user-facing cloud manager adding dozens of new features to solve cloud management and usage pain points for Enterprise Cloud customers. In 2023, Trusted Cloud Summit and authoritative and prestigious events that promotes the best practice of cloud industry standards in China, and hosted by China Academy of Information and Communications Technology and China Communication Standards Association. Our Galaxy Stack won 2 milestone awards namely Best Practice Awards for technology and Best Practice Awards for public services cloud, validating our outstanding technical strength in the domain of dedicated cloud.
In the new AI era, we are beginning to see results from our rapid response to and comprehensive embrace of AIGC. Leveraging our neutral positioning, we have gained the preference of independent AI companies and signed up a dozen of new AI customers. As the sole strategic cloud platform in the Xiaomi and Kingsoft ecosystem, we are working closely with Kingsoft Office on WPS AI, enabling model training and inference business deployment. Partnering with industry-leading large language model and vector database providers, we launched our mass mutual trust dedicated zone solution to bridge the trust gap in AI 2B use cases. We also carried out AI targeted upgrades to our container and storage products to support InfiniBand technology and multimedia processing in AIGC use cases. In addition, we are collaborating with the Xiaomi and Kingsoft ecosystem to purchase or lease AI service from various channels. conducting tests and evaluations of domestic GPUs for alternative contingency plans.
To develop and grow our Wuhan R&D center, is our significant strategic initiative, which will help us nurture new talents for maintaining our technological leadership in the medium to long run. In less than a year since its inception in last October through voluntary relocation of key R&D staff from Beijing and Wuhan local recruitment, our Wuhan team has quickly grown to approximately 400 people accounting for more than 1/3 of our total R&D team and 50% of the Wuhan team hold a Master's degree. We also organized a Star training camp at Wuhan Center to provide aspiring university graduates with a fast track to transition from campus to workplace and attract talent from Wuhan's top universities by fostering a sense of belongingness in our corporate family.
In summary, the continuous and rapid improvement in our profitability over the past few consecutive quarters have strengthened our belief in the strategies and the directions we have chosen. Looking ahead, we will nimbly uphold the principle of high-quality and sustainable development and focus on technology, reputation and management to drive progress, thereby creating value for our customers, shareholders, employees and the society. I will now pass the call over to our CFO, Henry, to go over our financials for the second quarter of 2023. Thank you.
Haijian He
Thank you, Mr. Zou, and I welcome, everyone, for joining the call. Now I will walk you through the financial results for the second quarter of 2023. Uphold the strategy of high quality and sustainable development we are pleased to deliver another quarter of steady profitability improvement. Our adjusted gross profit continued to grow for the fourth consecutive quarter and achieved a record high of RMB 206.8 million, increase by 202% year-over-year, representing adjusted gross margin of 11.3%. Along with our strict expense control, our normalized adjusted EBITDA narrowed from negative RMB 163.7 million in the same period of last year to negative RMB 59.9 million this quarter. As a result, normalized adjusted EBITDA margin further narrowed from negative 8.6% in the same period of last year and a negative 5.9% in the last quarter to a negative 3.3% this quarter.
Thanks to the operational efficiency improvement, the quarter-over-quarter narrowing of normalized adjusted EBITDA margin outpaced the increase of adjusted gross margin. Our total revenue were RMB 1,835.4 million this quarter, of which revenue from public cloud services were RMB 1,159.5 million. representing a decrease of 10.1% compared with RMB 1,289.1 million in the same period last year. As we steadily adjusted, our revenue mix and proactively scaling down services to our top CDN clients. Revenue from Enterprise Cloud services were RMB 675.2 million, representing an increase of 9.5% in from RMB 616.6 million in the same period of last year. The year-over-year increase was mainly driven by our continued focus on selected verticals and quality projects, recovery from COVID-19 impact. Our investment into flagship projects, bearing fruits, enhancing our capabilities to replicate the solutions and services to different regional customers. We continue to enhance our cost control measures. Total cost of revenue decreased by 11.5% year-over-year to RMB 1,628.8 million. IDC costs decreased significantly by 16.4% year-over-year from RMB 1,029.1 million to RMB 860.7 million this quarter.
Depreciation and amortization cost decreased by 18.8% from RMB 249.1 million in the same period of last year to RMB 202.1 million this quarter. Solution developments and services costs decreased by 7.4% from RMB 489.1 million to RMB 452.9 million this quarter. Fulfillment costs and other costs were RMB 71.7 million and RMB 41.3 million this quarter, respectively. Adjusted gross profit of this quarter increased by 202% to RMB [206.8] million, representing adjusted gross margin of 11.3% this quarter, compared with 6.6% in the same period of last year. The significant margin improvement testified to be the effectiveness of strategic adjustments of revenue mix, improvement of our infrastructure efficiency based out of loss-making customers and optimize Enterprise Cloud project selections and efficient cost control measures, demonstrating our strong commitment to improve our profitability and delivering high quality and sustainable development.
Each of our business lines achieved margin improvements. Gross profit of public cloud services was RMB 59.7 million, which was significantly improved from a gross loss of RMB 30.7 million in the same period last year. Gross margin on public cloud services was 5.2% compared with negative 2.4% in the same period of last year. The improvement was mainly due to a proactive scaling down of CDN services and adjustment of our [client mix]. Gross profit of Enterprise Cloud services was RMB 146.7 million, compared with RMB 94.6 million in the same period last year. Gross margin of Enterprise Cloud services was 21.7%, improved from 15.3% in the same period of last year. The improvement was mainly due to our rigorous Enterprise Cloud project selection. In terms of expenses, excluding share-based compensation and impairment of long-lived assets, our total adjustment operational expenses were RMB 538.1 million decreased by 9.7% from RMB 595.8 million last quarter, of which our adjusted R&D expenses were RMB 182.3 million, decreased by 10% from last quarter. Adjusted selling and marketing expenses was RMB 128.3 million compared with RMB 104.2 million last quarter. Adjusted G&A expenses decreased largely by 21.3% and from RMB 289.1 million last quarter to RMB 227.5 million. We have been taking strict expense control over the period, such as reduction of several expenses and screening of other discretionary expenses and others.
As of June 30, 2023, our cash and cash equivalents and short-term expense investments amounted to RMB 4.3 billion, providing us with sufficient working capital and liquidity for operations. The capital expenditures for this quarter was RMB 89.0 million, which primarily consists of payment for service. We have been taking prudent control of our procurement of traditional CPU service, such as the one useful CDN business. We have been saving our funds for high-performance AI service, and we are working very closely with the top leading global GPU service provider and their OEM partners to fulfill the orders. We expect the capital expenditures may increase in the second half of this year but subject to a time line of server delivery. Our operating cash flow once again recorded a net inflow after last quarter fluctuation reached RMB 65.2 million. It resulted from our margin improvements as well as our internal cash control enhancement.
Lastly, we are honored to see that we have been listed in the first addition of the sustainable year for China by S&P Global. The selection assessed almost 1,600 Chinese companies and out of those 88 outstanding customer -- companies across 44 industries are included in the 2023 sustainability yearbook China of S&P Global. We would like to send S&P global recognition of our ESG efforts. We will continue our commitment to improve our governance, decreasing our footprint of carbon emissions and making positive impact to the whole industry and the side. Looking ahead, we will continue to pursue our high-quality and sustainable development strategy and unlock synergies within the Xiaomi and Kingsoft group ecosystems while staying agile to capture new opportunities in the new era of AI technology. Thank you.
Nicole Shan
This concludes our prepared remarks. Thanks for your attention, and we are now happy to take your questions. Please ask your questions in both Chinese Mandarin and English also. Operator, please go ahead.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Xiaodan Zhang from CICC.
Xiaodan Zhang
(foreign language) I got 2 questions here. First of all, the company has been proactively scaling down the CDN business in the past year or 2. So when do you expect the structural optimization for your public cloud business to be completed? And is there any chance that your public cloud segment will return to positive growth in upcoming quarters. And secondly, what do management think of the prospects of incremental revenue contribution from a large language models and generated AI-related business.
Tao Zou
[Interpreted] So to respond to your question, you mentioned the structural adjustment we have been conducting in the public cloud services segment. And this can be break down into 2 parts. One is the CDN business and the other is the other public cloud services business. Now for the CDN part, actually, since I took the role of CEO last year, we have communicated with the market. And I would have to say that in general, the development for this adjustment of this business has been in line with what I have communicated in the past quarters. But due to the changes in the overall market situation the speed has been a little bit faster than what we had expected. However, in general, the pace and the direction is consistent. We would expect the adjustment for the CDN business to continue for a while, and we expect to complete that within half a year to 1 year. And for the non-CDN business parts of the public cloud services business, the business adjustment has been going through rather smoothly, and we have done an excellent job in terms of cost reduction.
As can be shown in our financial performances the gross margin for the public cloud services business has improved from negative 2.4% in the second quarter of 2022 to positive 5.2% in this quarter, which we are reporting. So this also relates to the second question that you asked about the AI business. We expect that this Roundup AI opportunity has the potential opportunity to bring us more growth to the public cloud services business.
Okay. So to answer your question, we do believe that this round of new AI opportunities will bring a lot of opportunity for us. As you can see after the Chinese Spring Festival, the GPT concept starting to explosively grows -- grow. The demand for AIGC have been particularly strong. And as mentioned, our neutral positioning has enabled us to win the favor of the vast majority of venture AI companies in China, and we are in the process of signing up contracts with dozens of such companies. And so this is about the -- in terms of supporting their computing power. In addition, as mentioned, we are also providing companies with mass models of service business. We are also making progress in that front. For example, we have launched the Mass Mutual Trust dedicated zone solution, and we're also collaborating very closely with Xiaomi and Kingsoft. So in general, in summary, basically, what we have been seeing is on the demand side, the demand is particularly strong. However, on the supply side, there's significant bottleneck in particular, in terms of NVIDIA's supply chain, the supply of GPU chips. And we believe that bottleneck is relatively difficult to resolve within the short period of time. So in short, the supply far exceeds -- the demand far exceeds the supply in the market. And that is not the situation for our [Class 1] companies. It's a general situation for the industry.
As a result of that, we had originally expected the revenue from AI to be shown in our financials in the third quarter, and that is likely to be delayed due to the shortage of supply of GPU servers through the fourth quarter or even the first quarter of 2024. The However, I would say in terms of overall deployment and response to this new era of AIGC, the results that we have achieved including the contracts that we have signed, including the models, the solutions that we have launched are quite successful. In the longer -- in the even longer term, we believe this will become embracing the AI wholeheartedly will actually become the most core direction for Kingsoft Cloud and Kingsoft Group.
Operator
We'll now move on to our next question our next question comes from the line of Timothy Zhao from Goldman Sachs.
Timothy Zhao
(foreign language) I have 2 questions. One is regarding the gross profit margin as I see the gross margin of public cloud and Enterprise Cloud has been the upward trend over the past few quarters and especially for Enterprise Cloud, the gross margin has achieved above 20% for the past 2 quarters. Could management further elaborate on the drivers of the gross margin behind that? And what is our updated view on the gross margin target for this year and in the midterm? And secondly, and also regarding the Enterprise Cloud. And the question is regarding the Enterprise Cloud and the question is regarding the revenue as I see the potential for the revenue has been in the declining mode slightly in the second quarter. Just wondering if there's any specific reason behind that? And how should we look at the revenue trend into the second half of this year.
Haijian He
Thank you, Tim. This is Henry. I'm happy to take on the first question, and our CEO, Mr. Zou take on the second one. So (inaudible), actually I acknowledge the improvement of the gross margin of our Enterprise Cloud business. Actually, there are a few things we actually discussed this earlier, but you eventually see that trend actually kept very stable and see that improvement expansion. A few things. First of all, as we talked about this right client selection process. So I think that's actually the first and the beginning point that to do the right business with the right people. And if you do look at our average revenue mix from Enterprise Cloud, we used to have some kind of heavy weight on the top line with over RMB 30 million or RMB 40 million per contract. But right now, we are focused on the sweet spot around like $8 million to about RMB 10 million per contract. So working on that range of the right clients, we have a better ability to control the costs and make sure that all the receivables and cost control measures can actually finally deliver. I think that's the first point.
The second one is really about the repeating sales for the more standardized products. So we're working very closely with the sales team and our R&D team as well. So we will make sure that we not only work with 1 client or 1 product, but one who we're working with different clients with the same product. So I think that percentage, obviously, we didn't disclose the number, but from last year to this year, the standardization of the product services and solutions has been a very important driver. That's the second part. And the third one is really about, I appreciate all the good comments from the research analysts and our shareholders. We're actually moving up from the [ice] to PaaS level of the services. And in some cases, we're actually working with clients on SaaS level products, especially given the AI drivers and a new phenomenon. Hopefully, we can actually go up a little bit, obviously, it depends on different verticals on the right penetration of the PaaS and SaaS level product, which actually narrow carry with some higher margin.
So as a conclusion, Tim, we do believe we have capacity and willingness to keep the gross margin above 20% of the Enterprise Cloud services, including both Kingsoft and Camelot as well. And given the right incentive for our solution delivery team to control their own costs, which we actually embedded into their own budgeting and bonus calculation, we hopefully have more internal measures to make sure this pressure has been moving down the chain and make sure everyone working, Kingsoft Cloud actually pay attention on the bottom line. So going forward, hopefully, we can keep above 20% of gross margin of Enterprise Cloud as well as we're hoping after the AI eventually unfolded, our Enterprise Cloud margin even higher, hopefully, above the 3 handles in the midterm. So I think that give you -- hopefully give you some color. Thank you, Tim. And the second question, will pass over to Tao Zou.
Tao Zou
[Interpreted] Okay. So before I answer the details of the question, I would like to give you an overview of how we think about the Enterprise Cloud business. The root thinking is that we have been becoming more focused on high-quality product -- high-quality projects in terms of selecting high-quality projects and also for the projects that are more sustainable for us. So in terms of project quality, in terms of reputation, in terms of deployment capabilities and services we offer to customers, we have been working very hard on those fronts. And that is why you have been seeing in the consecutive quarters, we have been experiencing improving profitability levels. Now as to your question of why the slight decrease for the revenue of Enterprise Cloud for for the second quarter versus the first quarter. The answer is really just the seasonality because the revenue recognition for Enterprise Cloud projects general delay in terms -- from the time of the signing of those projects to the revenue recognition -- or for several quarters to 1 year some in any -- and in some other cases can be as long as 2 years.
And therefore, the financial results you see in 1 single quarter is the added -- is the combined result of different projects signing at different time points and the different delays in the overall revenue recognition cycle. And therefore, I wouldn't say that the slight decrease for the financial -- for the revenue for Enterprise Cloud for the second quarter versus the first quarter is a reflection of the -- of our business performance for the Enterprise Cloud. On the contrary, we feel that the fundamentals of the Enterprise Cloud business have been going quite well. And in some future quarters, for example, in the fourth quarter, you might be also seeing a sudden search of our enterprise cloud revenue. However, that not necessarily reflect an equivalent search of the business fundamentals. So that's the general idea. I would like to give you. In fact, we have also been in communication with the auditors and hoping to find the metrics that would provide a real-time reflection of our fundamental business situation and the alignment with that of the financial performance. We are still exploring that. We hope to find that metric soon. Thank you.
Operator
We'll now move on to our next question. Our next question comes from the line of Allen Li from JPMorgan.
Allen Li
(foreign language) I have a follow-up question on gross margin. So for public cloud services, if we exclude CDN business, what's the gross margin trend for core computing and storage in the past few quarters? And how do we think the trend into the second half? And also, Henry, you just mentioned you have increasing revenue contribution from higher margin Saas and the PaaS services? And could the management share some color on how should we think about the long-term revenue contribution from these 2 business.
Haijian He
Thank you, Allen. This is Henry. Happy to share some color. So first of all, again, while we're talking about the structure change in the client and revenue mix CDN versus non-CDN but I want to point out that the CDN business itself is not really a problematic business. The point is a concentration risk together with the CDN products to certain clients is really a high-risk flat for us. That's why we did some changes in the past few quarters. But putting that aside, as you mentioned, there are 2 things we can share while we haven't disclosed things in detail [net] numbers. First of all, the margin of the CDN business does have certain fluctuations. It depends on the season, depends on the time mix. And while we're cutting down certain client penetration and the client concentration, we do need to switch and reallocate certain resources, especially on the DNA and the bandwidth we need to change and cancel, and renew those actions will take on some fluctuations. But I would say that in all days, let's say, last year or a year before, as you mentioned, there are certain quarters, our CDN business gross margin [net gained] in certain regions, certain notes but right now, we do have a relatively stable positive gross margin of the CDN business, while it's really not as high as a public cloud product.
The second part is the gross margin of the cloud -- public cloud services, including computing network and storage, definitely higher and I think CDN products are much higher than the [non-CDN] products in terms of the gross margin and we are trying to improve the percentage of the revenue from that product. So if you're putting that everything together, I think in a few quarters when we're looking ahead, given that we do have a lot of efforts on the resource management and the cost control. Hopefully, the spread between the computing storage versus the CDN will be expanded and the computing and storage, database and the network products will deliver even higher gross margin going forward given the changes we have so I don't want to provide a detailed guidance on the gross margin by product. As I mentioned, it's really a dynamic and kind of fluid in certain situations. But overall, I can tell you that from a management perspective, we are aiming for a relative expansion for the public cloud gross margin as a whole, and we'll try to manage on that and 1 more point is you don't have to split that out because 1 client, they will use multiple product lines. And in 1 IDC centers, we may deliver different products and when resources were trying to co-share and provide more utilization as well. So it's not really from the very single straightforward line of calculation. So hopefully, you can understand.
On the second point is I think the earlier question from Tim was really regarding Enterprise Cloud. It's not really about the PaaS or SaaS within the public cloud really 2 different animals, put this way. So the Enterprise Cloud side, as I mentioned, our PaaS and the SaaS level, they are packaging with the solution and our services, and we do see that service convert to a higher margin. on the public cloud, I don't want to provide a detailed guidance because as I mentioned, once AI is coming, all the business new model is changing when we're talking about the (inaudible) and other things, my CEO mentioned, we don't want to kind of developed and divided by the traditional concept of IaaS and non-IaaS products. But we are aiming for the mass products and services is a whole package. And as a whole, I think the margin will be much higher than the traditional IaaS and computing services going forward. Thank you, Allen.
Operator
Due to time constraints, this concludes our question-and-answer session. So I'll hand the call back to you for closing remarks.
Nicole Shan
Thank you, operator. Thank you all once being for joining us today. If you have any further questions, please feel free to contact us. We look forward to speaking with you in next quarter. Have a nice day. Thank you.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.
[Portions of this transcript that are marked
[Interpreted] were spoken by an interpreter present on the live call.
